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10 Risk management technology in financial services
example is China, Inc. After half a dozen years of prospering as the world’s workshop,
China now wants to be the world’s laboratory as well:
Innovation has become a national buzzword, and
Chinese leaders have been tossing it into their speeches since the beginning of 2006,
as the country starts an ambitious campaign to drive its economy further up the
Because of deregulation, globalization, innovation and technology – therefore
because of an accelerated pace of change – banking is experiencing similar challenges
to those of IBM, Microsoft, Google and China. To be successful, bankers should not
only understand the products of innovation, but also master them, which requires
cultural change. In a meeting at Bankers Trust in 1990, the executive vice president
David Sias suggested that for the next ten years, the bank will continue to make
money from paper. The large investments in high technology that we make today,
Sias said, aim to change our culture.
1.4 Strategic choices and unintended consequences
Entrepreneurship underlies the prosperity characterizing a free-market economy, and
the competition that it brings into place obliges the entrepreneur to move rapidly so
as not to fall behind. The cases examined in the preceding sections have demonstrated
how tier-1 entities develop novel ideas into successful businesses, by promoting:
Creativity applied to business life,
The need for tangible deliverables, and
Ways and means for being in charge of assumed risks.
In the late 1980s, two financial companies of different backgrounds – Bankers Trust
and Salomon Brothers – attempted to move into merchant banking on a large scale.
Salomon led an investment group in an unsuccessful effort to acquire control of RJR
Nabisco by means of a leveraged buyout. This had a lot of unintended consequences.
While Salomon’s bid did not succeed, the attempt signalled bond rating agencies
that the investment bank was prepared to increase its total risk appetite. The mar-
ket meditated on the after-effect, and ended with a negative appraisal. This hurt
Salomon’s other lines of business, which were significant sources of profits and had
sustained the company over the years.
For Bankers Trust, too, its merchant banking foray seemed to have little connection
to the leadership it had acquired in personalized customer products. Specifically, its
derivatives business, which was the main market thrust since its previous strategic
plan. On Wall Street, analysts said the change towards merchant banking was a
mistake, for a number of reasons:
The customers were different,
The employees were different,
The technology was different, and
The required management skills were different.